Benjamin Friedman's Day of Reckoning

...There will be more such embarrassing moments before this president completes his term...

...High U.S...

...Like the Calvinism of old, this neo-Calvinism's effect is to divert attention from the distribution of income and wealth in the here-and-now to obsession with a distant future punishment for a collective financial sin...

...It has already denied Reagan's Republican heir the ability to capitalize on the extraordinary events in Eastern Europe...

...Friedman's book has been endorsed by just about everyone in the mainstream of the economics profession, and the fact that it is so highly regarded reveals how extensive is the triumph of Ronald Reagan...

...And if the Republicans won't do it, don't the Democrats have to...

...We start with a reasonable criticism of Reaganomics, but before long the spirit of the biblical prophets he quotes at the beginning of each chapter begins to dominate the argument...

...The Democrats took the bait...

...Democrats in Congress, lured into the trap by Reagan's indifference to the deficit, tripped over the wire strung out by Gramm and Rudman and are now face down in the budget deficit mud...

...But this is largely a function of the dramatic upward shift in income...

...If by some miracle it worked, fine...

...But does it justify a politically hopeless politics of austerity, condemning Democrats to offering up the slaughter of their own innocents to save the nation...

...dollars...

...As a result, we have a "Third Deficit" in public investment for education, public infrastructure, research and development, and so on, that by the most conservative measures comes to at least $100 billion...

...But domestic politics is the bottom line...

...Indeed, the likely outcome of the budget deal is higher taxes and less services for the lowerand middle-class Democratic constituency, for which Bush will blame the Democrats...

...economy to be more risky business, demanding higher and higher interest rates as compensation for the risk, until rates get so high as to precipitate a massive recession possibly dragging the rest of the world down with us into another Great Depression...

...By focusing so hard on our financial position and not at all on the problem of making products competitive and regaining markets in which we can sell them, Friedman and the neo-Calvinists are missing the point...

...Imports therefore rose faster than exports, leading to the huge merchandise trade deficit, which had to be paid for by further borrowing or by selling off U.S...

...In the 1980s, the real incomes of the bottom 60 percent of the population fell and that of the next 20 percent was stagnant...

...Despite ritualistic denunciation of the deficit, Republicans have been in no hurry to make sacrifices to eliminate the deficit...

...Friedman also—like most of the neo-Calvinists — exaggerates the size of the deficit...

...Another was the absurd campaign of 1988 in which Michael Dukakis, declining to make populist promises for fear of jeopardizing his bogus credentials as a budget balancer, let his liberalism be defined as being soft on murderers...

...Thus, it turns out that the much cited growth in personal consumption spending as a share of production (GNP) in the 1980s was primarily a result of a drop in the rate of growth of production...

...position in the world's marketplace was dominant, and the next decades saw the longest economic boom in our history...

...As the original Calvinists discovered, borrowing money is no sin...

...Recently, his OMB director, Richard Darman, one of the architects of Reaganomics, has been speaking out, with a straight face, against selfishness...

...Given the potential descent into economic hell postulated by Friedman, it follows that reducing the deficit (to the tune of $100 billion dollars per year) is the most important task confronting us...

...The answer is no—on several counts...

...It has helped raise interest rates, aggravated our trade imbalance, and caused an uncomfortable reliance on foreign investment...

...The Democrats appear to be on the principled high ground, concerned with the future of the nation, while the Republicans simply win elections by pandering to the demand of the populace for instant economic gratification...

...The theory is that this will raise the savings rate...

...The same discontinuity between the analysis of the causes of our problem and the neo-Calvinist solution is revealed in Friedman's seemingly objective listing of the options for spending cuts...

...government owes to itself does not carry the same burden as the debt it owes to outsiders...

...dominance over the world's markets fostered the illusion that American economic policy could be limited to macroeconomics: overall fiscal and monetary policies and the question of how to foster the production of goods and services that can be sold competitively was left to the private sector...

...market...

...Because we don't sell securities in yen or marks, however, this meant that foreigners first had to buy U.S...

...It is appropriate therefore that the most definitive statement of economic neo-Calvinism, Day of Reckoning, by economist Benjamin Friedman of Harvard, is full of Old Testament denunciations of borrowing and debt that would inspire the burgher congregation of a seventeenth-century Dutch Reformed Church...

...Because U.S...

...But addressing these sorts of questions poses a problem for the mainstream of the economics profession...

...A second subtraction could reasonably be made for inflation, which over time reduces the real value of the federal debt...

...In Friedman's world, the question of maintaining demand is peripheral, just as it was to the economists who advised both Herbert Hoover and FDR that balancing the budget was the answer to the oncoming depression...

...But progressive or regressive, it must be done...

...As economist Robert Eisner has pointed out, state and local government surpluses should be subtracted from the federal deficit to get an accurate picture of its impact on the economy...

...But it's not going to get America out of its economic doldrums, and it's not going to get the Democrats back into the White House...

...One can imagine a flight from the dollar creating a financial panic because of our dependence on foreign financing...

...But the choice is rigged by an absence of context...

...Even the last years of "supply-side" policies has verified this observation...

...The deficit is a problem...

...The extravaganzas of Malcolm Forbes and Saul Steinberg, as well as others slightly less rich and famous, in the face of increasing poverty and suffering certainly are worthy of a few Jeremiads...

...He also tells us that he expects the Federal Reserve to do its duty and lower interest rates while the budget deficit is being lowered...

...savings...

...Deficits by themselves tell us nothing about the future path of the economy...

...But one does not have to agree with Heilbroner and Bernstein that the real deficit in 1988 was practically zero to accept their larger point that the deficit does not nearly represent as big a threat to U.S...

...Indeed, everything that we have learned about economics in the past fifty years tells us that savings is a function of higher income growth...

...deficit with Japan...

...But experience suggests that it could have the opposite effect of reducing savings as families spend still larger shares of dwindling incomes in order to maintain their living standards...

...Friedman himself tells us earlier in the book that "between 1979 and 1987, the after-inflation gain in per capita consumer spending was just 1.8 percent per annum, even less than the 1.9 percent during 1973-79...

...First, the notion that America is on a consumption binge is simply not supported by the facts...

...Friedman thinks that "the single best way to raise the revenue we need would probably be a tax on spending for personal consumption...

...Americans aren't overconsuming...

...The neo-Calvinists claim that, on the contrary, the present budget deficit is understated because it is calculated after netting out the debt sold to various agencies of the U.S...

...But the future will not wait...

...Republican strategists—who don't get out of bed without taking a poll—have been on to this for awhile, as was demonstrated by George Bush's campaign for a kinder, gentler "education Presidency...

...dollar peaked against the yen in 1982 before the big run up in the U.S...

...Of course, the political burden of the deficit cuts both ways...

...Much of Friedman's book is a criticism of Reaganomics...

...But one can also imagine economic disasters stemming from causes other than the budget deficit—for example, a crash coming from continued excessive speculation in finance and real estate, a continued loss of industrial markets, a failure to increase the number of skilled workers to compensate for the coming shrinkage in labor-force growth, the growing cost of health and environmental protection, a global depression brought about by world incomes falling behind the expansion of capacity...

...His last WAITER • 1990 • 111 chapter is called "Hard Choices," a campaign favorite of the dour Dukakis...

...112 • DISSENT Books He does not, however, shrink from proposals that would reduce incomes of average Americans further, either by raising taxes or by slowing economic growth, or both...

...It was our competitiveness in the world that fueled our postwar success...

...One result of this Democratic neo-Calvinism was Walter Mondale's disastrous demand for higher taxes in the campaign of 1984...

...Savings rise when people spend and invest...

...Finally, those parts of the federal budget that represent investments with long-term payout—bridges, buildings, and so on—should be only partially included in the current budget, as is the accounting custom in the private sector...

...Neither does he have the money for a war on drugs...

...Given these acknowledged facts, how does Friedman arrive at his "overconsumption" thesis...

...Other civilian spending—for education, health, transportation, research and development, housing, the environment, and so on—fell from 27 to 17 percent...

...Again, given the undeniable waste and corruption in the military sector, it is curious that our moral zealot, Professor Friedman, suddenly becomes a relativist and slips out of making the hard choice...

...Savings rates, which were supposed to rise in response to lower taxes, fell, and the share of personal income devoted to spending for immediate consumption rose...

...Somewhat overwritten, it shows in competent detail how, by lowering taxes without lowering total spending, Reagan's program generated the largest peacetime fiscal deficit in history...

...If Friedman were an agent provocateur (he is not) sent by the Republican National Committee to inflict confusion in Democratic ranks, this is exactly the book that he would write...

...Therefore, by definition, consumption has accelerated...

...interest rates compared to prospective inflation—have therefore remained historically high despite our easier monetary policy since mid-1982...

...Ronald Reagan himself may or may not have seen the trap he laid for the Democrats (I suspect he did), but Stockman, Kemp, Roth, and the rest of his gang saw it...

...It gets them good notices in New York Times editorials, citations in Business Week, and invitations to preach to corporate congregations...

...Even the Heritage Foundation is suddenly worried about the thirty-seven million Americans without health insurance...

...Recessions aside, it is not clear that there has been any improvement in the 1980s at all, even from the limited perspective of growth in consumption...

...Since 1980 entitlements spending has remained roughly stable as a percent of all federal spending...

...In chapter 1, it is Reagan who has fallen from grace...

...But his master stroke was the engineering of a large fiscal deficit, a political scorched-earth policy that denied his enemies the resources to capitalize on a liberal swing in the political pendulum after he was gone...

...Long ago, Keynes observed the "paradox of thrift" —as people try to save a higher proportion of their income, the reduction in demand (sales) decreases economic activity and eventually their own incomes...

...For the right, it was win/win...

...Friedman explains: With our available savings more than halved by the federal deficit, but our investment needs certainly no less than before, businesses and individuals have had to fight harder than ever for what savings has been left...

...His achievements in the conservative cause were many: obvious examples include an upward shift in the distribution of income and wealth, a decimated civilian public sector, the return to respectability of labor-bashing, and the abandonment of vital economic sectors to an invasion of subsidized imports and a feeding frenzy of domestic speculation and fraud...

...by chapter 11, the rest of us are called upon to pay financial atonement for his Original Sin...

...Much of the answer is that Friedman, like other neo-Calvinists, is a little slipshod with the word "consumption...

...The real problem is that borrowing in the 1980s was thrown away on a wasteful binge of military spending and tax giveaways to the rich...

...It will be better served by making these investments—even if it means increasing the deficit—than by another year of letting a million kids drop out of school, another year of falling WINTER • 1990 . 113 behind the rest of the world in civilian research and development, another year of delay in improving water systems and cleaning the air...

...If we are to be saved from the fire and brimstone of a flight from the dollar, sacrifices must be made...

...Nor could they have imagined how much help they would get from the increasingly conservative pool of think-tank pundits and professors from whom the Democrats draw their policy expertise...

...The word changes meaning halfway through the discussion...

...Over the same period, income from assets, which goes primarily to the rich, rose three times as fast as income from working...

...In my view, Eisner and Heilbroner and Bernstein are a little too cavalier about the international dimensions of the deficit and our consequent dependence on foreign financing...

...It's a Catch-22: In order to find the money for new programs, they must cut the deficit...

...Friedman personally would like to see all this done in a progressive humane way...

...stability as the neo-Calvinists would have us believe...

...Another problem with Friedman's formulation is that at least some of the damage to the U.S...

...our debt was incidental...

...q 114 • DISSENT...

...George Bush had the opportunity of a cold-war lifetime to make Poland an economic satellite of the West, but he couldn't come up with the money...

...Until the Democrats once again are willing to risk some economic heresy, they will remain trapped in the choir of Ronald Reagan's church...

...But if the power of right-wing ideology is receding, Ronald Reagan's works still cast a long shadow over the American political economy...

...As many of them have since admitted, they knew at the beginning that the Laffer Curve rationale for Reaganomics —lower taxes would spur people to work harder, stimulate faster economic growth, and return enough to the treasury to balance the budget—was an illusion...

...It worked for thirty-five years...

...Only the incomes of the top 20 percent rose, and most of that rise was concentrated in the top 5 percent...

...For that they will need a touch of the old-time religion: using government to expand the economic pie and to cut bigger slices for the 60 to 80 percent of Americans who are losing ground in the economic race or are afraid they soon will...

...Real interest rates—i.e...

...With much of Friedman's analysis, there can be little dispute...

...But, as Robert Heilbroner and Peter Bernstein note in their excellent little book, The Debt and the Deficit, the debt the U.S...

...the rich Americans are, because they are receiving too much income...

...For example, the tight-money policy of Paul Volcker was a major cause of high interest rates...

...Given the stagnation of incomes over the last decade, the most sensible explanation of our low savings rate is not a consumption binge but the incomes squeeze on working Americans that has forced them to spend a larger proportion of their income in order to pay the mortgage, feed the kids, and rent videotapes...

...It would be preferable to raise the money needed for such investments by taking it from those sectors of the economy that have benefited from the Reagan deficits—the military and the rich...

...Excessive military spending and tax cuts to the rich fade before a vision of modern Sodom and Gomorrah in which all Americans are condemned to the flames...

...People, businesses, and governments properly go into debt to finance productive investments that will generate more income in the future...

...But partisan politics aside, aren't the Democrats in fact trying to do the right thing...

...industrial and trade policies are still beyond the ideological pale, the best that mainstream liberal economics has to offer is wage austerity in the guise of moral rectitude...

...Pressured by the need to raise campaign funds, they snapped at the chance to become the party of Fiscal Responsibility in the mistaken belief that they could capture a Chamber of Commerce constituency...

...But he is clearly willing to risk recession today—with the attendant danger that the overhang of consumer and business debt will make it a long and deep one—in order to achieve his goal of running a budget surplus to avoid a flight from the dollar at some time in the future...

...Had it not been for the most inept political campaign in memory, this shift in public mood would probably have put a Democrat in the White House...

...As Robert Kuttner has pointed out, the traditional Democratic formula of "tax-spend-elect" has been altered to "tax-tax-tax...

...economy that he and other neo-Calvinists attribute to the fiscal deficit was clearly a result of other factors as well...

...assets to foreign investors...

...The "Day of Reckoning" will come one of two ways: either the interest charges on our growing debt will become so onerous that our children will be forced into poverty similar to that now being forced on Third World debtor nations, or foreigners will begin to perceive investing in the U.S...

...in order to cut the deficit, they must raise taxes or cut programs...

...interest rates drew in money from Europe and Japan, thereby making up for the drop in U.S...

...But the U.S...

...Indeed, when pushed, a number of analysts who are generally allied with the neo-Calvinists will admit that the fiscal deficit at best is responsible for less than half of the trade imbalance with the rest of the world...

...Indeed, America's economic elite seems to have an inexhaustible supply of moral indignation against deficit spending that infuses newspaper editorials, the business press (whose readers overwhelmingly vote Republican), statements of high-level commissions, and the papers and books of present, past, and future advisers to Democratic candidates...

...But now the forces of world competition have broken through the self-contained American economy, flooding it with the products of mercantilist nations where governmental policies target shares of the U.S...

...since Bush is opposed to a tax increase, cutting programs is inevitable...

...Friedman hands us the sword with which we must make the Solomon-like decision...

...Solutions point to much more government intervention than most are comfortable with...

...There is a fair amount of moral consolation to this line of reasoning...

...government — principally the Social Security Trust Fund...

...The result was a rise in the value of the dollar, which made imported goods cheaper and our exports more expensive...

...To be sure, some Americans are consuming at obscene levels...

...In it, he tells us that we must cut programs and raise taxes, particularly the latter...

...They love it at the Kennedy School...

...During World War II, we ran huge deficits and at its end, our national debt was larger than our GNP (today the debt is about 43 percent of GNP...

...Military spending rose from 23 to 27 percent...

...The significance of this point for economic policy seems to be lost on Professor Friedman...

...Friedman seems to arrive at this conclusion by allowing his flights of moral fancy to run away with his analysis...

...But when it comes to solutions for excessive "consumption," he demands that America end not its militarism but its alleged hedonism and, therefore, cut living standards...

...And, again as Friedman admits, it was consumer spending that fueled the recovery and has since kept the nation from sliding back into a recession...

...Moreover, the fiscal deficit has so befuddled the Democratic party intelligentsia that the extent to which one is regarded as a deep thinker in Washington-Cambridge policy circles these days depends on how much one is willing to reduce the incomes of the Democratic party's own constituencies in order to pay for Ronald Reagan's debts...

...At the end of World War II, U.S...

...The problem has not been a lack of savings but a lack of income...

...Again, the "hard choices": we can cut entitlements (primarily Social Security, Medicare), military spending, or nondefense programs...

...Regardless of who set the deficit on fire in the first place, doesn't someone have to take responsibility for putting it out...

...But if it didn't, it would starve the welfare state by cutting off the supply of revenues...

...Indeed, obsession with the deficit could well be more of a threat than the deficit itself, especially when it prevents us from investing in the future...

...Yes, the deficit is a problem...

...Not a bad performance for a man regarded by both left and right intellectuals as a nincompoop...

...They have the Democrats where they want them...

...Neo-Calvinism obviously has its attractions for the Democrats as well as for their gurus...

...L this sense, mainstream economics has become quite reactionary, building on pre-Keynesian notions that simply assume away the problem of maintaining sufficient purchasing power...

...Collapsing bridges, the Savings and Loan swindles, rising homelessness, the antics of Leona Helmsley and Ivan Boesky have begun to sour Americans on the exaltation of greed as the guiding inspiration of public policy...

...Even the boldest and most prescient of Republican strategists 110 • DISSENT Books could not have guessed how completely their opponents would fall for it...

...Friedman covers himself on this with a paragraph urging surplus nations—Germany and Japan—to keep their markets open and their consumers buying...

...And the notion that the trade deficit is solely a result of the high dollar sparked by the deficit is belied by contradictory evidence—such as the fact that the U.S...

...When identifying the causes of our problem, military spending is considered consumption, that is, spending for other than business investment...